Wednesday, October 5, 2011

Is Social Security a Ponzi Scheme?

The controversy surrounding Social Security is reaching a fevered pitch. It is becoming clear that there are not enough funds to keep Social Security solvent much longer. Something has to be done. But what? Those on the left want to see higher taxes, especially on the rich to keep Social Security going. Those on the right would love to see it privatised, fully or partially.  A question that needs to be addressed is if Social Security is a Ponzi Scheme. If it is, it would be a difficult program to maintain indefinitely. If it is not, then a more sustainable solution can be proposed. So is it?
Walter Williams has some insight on this:      
 The very first Social Security check went to Ida May Fuller in 1940. She paid just $24.75 in Social Security taxes but collected a total of $22,888.92 in benefits, getting back all she put into Social Security in a month. According to a Congressional Research Service report titled "Social Security Reform" (October 2002), by Geoffrey Kollmann and Dawn Nuschler, workers who retired in 1980 at age 65 got back all they put into Social Security, plus interest, in 2.8 years. Workers who retired at age 65 in 2002 will have to wait a total of 16.9 years to break even. For those retiring in 2020, it will take 20.9 years. Workers entering the labor force today won't live long enough to get back even half of what they will put into Social Security. Social Security faces Ponzi's problem, not enough new "investors." In 1940, there were 160 workers paying into Social Security per retiree; today there are only 2.9 and falling.
This is clearly a Ponzi scheme. Just based on demographics, there will be for the foreseeable future less workers contributing to Social Security than retirees taking out benefits. That is only one problem. The other one is the mismanagement of Social Security funds by the government. Over the years, the bureaucrats have borrowed from the Social Security trust fund and replaced it with Treasury notes. In other words, I.O.U's from the government. At present it seems to be a "safe" investment, but if the U.S. debt keeps growing and Mr. Bernanke keeps running the printing presses (or digital accounts on a computer), those Treasury notes become less valuable...just pieces of paper and government promises. I ask you, do you want to trust your future to these promises?   
Back to the main point: is Social Security a Ponzi scheme? Yes, only worse. It is compulsory. You or I have no choice but to participate. I see it as a Ponzi scheme, but I do not have the choice to "opt out". At least with Mr. Ponzi, once people catch on, they can stop contributing.
Something does have to be done. Right now there are three choices:
  1. Raise taxes. That always happens. This process never stops. My question: When is enough, enough? Nobody has a clear answer to that, so we see "tax creep" .
  2. Lower benefits. Bummer. I paid all these years into Social Security (maybe even more taxes) and I get less back than my grandparents?
  3. Print more money so the government keep the Social Security checks coming. Alas, this always happens as well. The bad thing about this is your check stays the same size, but the dollars you get have less purchasing power. 
This is not promising. Much worse is my concern for my kids. Increasing their taxes and lowering their benefits will make it harder for my kids to build a good life for themselves.
What about a solution? Somehow Social Security needs to be dismantled. Once again, Walter Willams has a partial solution:
 I believe that a person who is 65 years old and has been forced into Social Security is owed something. But the question is, Who owes it to him? Congress has spent every penny of his Social Security "contribution." Young workers have no obligation to be fleeced in order to make up for the dishonesty and dereliction of Congress. The tragedy is that most seniors just want their money and couldn't care less about whom Congress takes it from.
Here's what might be a temporary fix: The federal government owns huge quantities of wasting assets – assets that are not producing anything – 650 million acres of land, almost 30 percent of the land area of the United States. In exchange for those who choose to opt out of Social Security and forsake any future claim, why not pay them off with 40 or so acres of land? Doing so would give us breathing room to develop a free choice method to finance retirement.
It is just one idea, but I think he is on the right track.

For reference, here is his whole article.

Feel free to comment.